Wednesday, 2 November 2011

David Cameron alighted on Citigroup’s investment advice to companies proposing to invest in Scotland like a fly on to a pile of shit at PMQs today.

Perhaps we should know a little more about this giant financial corporation – too big to fail – as it tries to wreck Scotland’s renewables investment by advising against investment “this side of a referendum”.

Citigroup used to be the largest company and bank in the world by total assets - until the global financial crisis of 2008. Today it is ranked 10th in size by composite index.

Citigroup suffered huge losses during the global financial crisis of 2008 and was rescued in November 2008 in a massive stimulus package by the U.S. government.

Despite its huge losses during the global financial crisis, Citigroup Inc. built up an enormous cash pile in the wake of the financial crisis with $462 billion USD, which is more than Sweden's nominal GDP of $458 billion USD

Citigroup and the Subprime mortgage crisis

Heavy exposure dodgy mortgages in the form of Collateralized debt obligation (CDOs), compounded by poor risk management led Citigroup into trouble as the subprime mortgage crisis worsened in 2008.

The company used complex mathematical risk models but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages.

The Head of Trading, Thomas Maheras was close friends with senior risk officer David Bushnell, which undermined risk oversight.

On the board of directors of Citigroup, was one Robert Rubin.He and a Charles Prince were said to have been influential persuading the company to move towards MBS and CDOs in the subprime mortgage market.

Robert Rubin, as US Treasury Secretary was said to be influential in lifting the regulations that allowed Travelers and Citicorp to merge in 1998.

As the crisis began to unfold, Citigroup announced on April 11, 2007, that it would eliminate 17,000 jobs, or about 5 percent of its workforce, to cut costs and bolster its long underperforming stock.

Even after securities and brokerage firm Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO's was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.

US Federal Government bail-out assistance

Over the past several decades, the United States government has engineered at least four different rescues of the institution now known as Citigroup.

Raul Salinas and alleged money laundering

In 1998, the General Accounting Office issued a report critical of Citibank's handling of funds received from Raul Salinas de Gortari, the brother of Carlos Salinas, the former president of Mexico.

The report, titled "Raul Salinas, Citibank and Alleged Money Laundering", indicated that Citibank facilitated the transfer of millions of dollars through complex financial transactions to hide the paper trail of funds. Citibank took on Raul Salinas as a client even though they did not make a thorough inquiry as to how he made his fortune

Conflicts of interest on investment research

In December 2002, Citigroup paid fines totalling $400 million, with the amount split between the states and the federal government.

The fines were part of a settlement involving charges that ten banks, including Citigroup, deceived investors with biased research.

The total settlement with the ten banks was $1.4 billion. .

Plutonomy memo

On October 16, 2005, a memo detailing how America was losing its grasp as a democracy, but rather becoming a Plutonomy. The memo was leaked to the public causing outcry against the memo's secretive nature of keeping the nation's wealthiest 1% in power over America through politics.

Enron, WorldCom and Global Crossing bankruptcies

Citigroup paid out over $3 billion in fines and legal settlements for their role in financing Enron Corporation, which collapsed amid a financial scandal in 2001.

In 2003, Citigroup paid $145 million in fines and penalties to settle claims by the Securities and Exchange Commission and the Manhattan district attorney's office.

In 2005, Citigroup paid $2 billion to settle a lawsuit filed by investors in Enron. In 2008, Citigroup paid $1.66 billion to the Enron Bankruptcy Estate, which represented creditors of the bankrupt company.

In 2004, Citigroup paid $2.65 billion to settle a lawsuit concerning their role in selling stocks and bonds for WorldCom, which collapsed in 2002 in an accounting scandal.

In 2005, Citigroup paid $75 million to settle a lawsuit from investors in Global Crossing, which filed bankruptcy in 2002. Citigroup was accused of issuing exaggerated research reports and not disclosing conflicts of interest.

Citigroup proprietary government bond trading scandal

Citigroup was criticized for disrupting the European bond market by rapidly selling €11 billion worth of bonds on August 2, 2004 on the MTS Group trading platform, driving down the price, and then buying it back at cheaper prices.

2008/2009 federal rescue from bankruptcy

As the subprime mortgage crisis began to unfold, heavy exposure to toxic mortgages in the forms of Collateralized debt obligations (CDOs), compounded by poor risk management, led the company into serious trouble. Its stock market value dropped to $20.5 billion, down from $244 billion two years earlier. As a result, Citigroup and federal regulators negotiated a plan to stabilize the company.

On November 24, 2008, the U.S. government announced a massive stimulus package for Citigroup, designed to rescue the company from bankruptcy while giving the government a major say in its operations. The Treasury would provide another $20 billion in Troubled Asset Relief Program (TARP) funds in addition to $25 billion given in October. The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) would cover 90% of the losses on its $335 billion portfolio after Citigroup absorbed the first $29 billion in losses. In return the bank would give Washington $27 billion of preferred shares and warrants to acquire stock. The government would obtain wide powers over banking operations. Citigroup agreed to try to modify mortgages, using standards set up by the FDIC after the collapse of IndyMac Bank, with the goal of keeping as many homeowners as possible in their houses. Executive salaries would be capped.

As a condition of the federal assistance, Citigroup's dividend payment was reduced to one cent per share.

In September 2011, a book titled Confidence Men|- Wall Street, Washington and the Education of a President, written by former Wall Street reporter Ron Suskind, states that Treasury Secretary Timothy Geithner ignored a 2009 order from President Barack Obama to break up Citigroup in an enormous restructuring and liquidation.

N.B. The Treasury Department denied the account in an e-mail to the media stating "This account is simply untrue …” Aye, right …

SUMMARY

In my view, Citigroup is exactly the kind of unaccountable global financial institution that caused the crash, but was too big to fail.

It is exactly the kind of company and the kind of behaviour that has caused protesters to camp outside St. Paul's in London and in George Square in Glasgow.

Would you buy a used car from anybody with the above record, never mind accept their advice on investing in renewable energy in Scotland - the country that led the first industrial revolution and will a make a major contribution to the next one?